We think of young people just out of college as having bright futures ahead of them, at the very dawn of their careers, ready to build their fortunes. The reality is somewhat different, with most graduates starting their professional lives with overwhelming debt.
The Federal Reserve released the “Report on the Economic Well-Being of U.S. Households in 2014” last month, painting a challenging picture for young adults just out of college. The report showed that student loans represent one of the highest debt levels among consumers, and in a significant number of cases, student loans are accompanied by credit card debt. Overall, 89 percent of respondents indicated that money owed for education was from a student loan, 4.9 percent from a home equity loan, 14.4 percent from credit cards and 10.6 percent from other loans.
Furthermore, a study from the Association of Credit and Collection Professionals and Ernst & Young showed student loans as being the second-highest type of debt in the industry, representing 25 percent of collections, second only to healthcare debt at 38 percent.
In a perfect world, young adults start planning for their futures, and even their retirements, from their very first post-college job, and those who are fortunate enough to do so on a sustained basis over 30 or 40 years will retire very wealthy indeed.
The U.S. Government Accountability Office also reported recently that about half of all households over 55 do not have any retirement savings, and of those households, more than half do not have a traditional pension, and half do not own a home. So what happens between “recent college grad with a bright future,” and “retiree with no money,” and how do you prevent that from happening?
Mainstream advisors tend to offer the same basic advice, including: contribute to your employer’s retirement plan, start saving early, put money into an IRA and avoid touching retirement funds. But more than anything, the best advice is to truly know your financial status from the very beginning. Knowledge is strength – and knowing and tracking your net worth over time is a good start. Use net worth calculators on a regular basis, like that on PersonalCapital.com’s web site, at https://www.personalcapital.com/financial-software/net-worth.
There are other tactics, many of which cost you money that you might not have – such as a Roth 401(k) account, which lets you pay taxes on your contributions at your current tax rate, and in exchange allows you to withdraw during retirement on a tax-free basis. A great deal if you can afford it, but in reality if every extra cent is going towards student loan debt, strategies like this just may not be realistic. Instead, you may need to focus on tax-free retirement contributions, at least until the student loan debt gets under control and your income increases, and switch to a Roth later. And if you’re like a lot of recent graduates and are one of the thousands of waiters, baristas and parking lot attendants with PhDs, you probably earn less than $30,000 a year, and you can take a “saver’s credit” of up to 50 percent of your contribution to your 401(k) or IRA up to $2,000.
Most importantly though, learn where to put whatever retirement money you have available, even if it is just a few dollars a week. Investing the whole lot in a dotcom startup may sound exciting – but a balanced portfolio of 401(k), mutual funds or low-fee index funds held over time is more likely to pay off.